There has been significant progress in the case law involving mortgage loan servicer negligence in the handling of loan modification applications. Recently, in Alvarez v. BAC Home Loans Servicing, the California Court of Appeal (First Appellate District, Division Three) held — for the first time– that a mortgage loan servicer owes a duty of care to borrowers in reviewing their loan modification application. Although another appellate decision in Jolley v. Chase Home Finance had issued a similar ruling, Jolley involved a construction loan and didn’t specifically discuss whether the holding would apply to a residential mortgage loan.

Prior to this case, there had been divergence in opinion at the trial court level– many finding that a duty of care could be found if a servicer was neligent in reviewing a loan mod application, and others finding that servicers could never be negligent in such circumstances because the servicer was acting in its “conventional role as a lender.” By relying on the1991 case Nymark v. Heart Fed Savings & Loan Association, many trial courts concluded that reviewing a borrower’s loan modification application could be considered part of its role as a conventional role as a lender and therefore could not be negligent in its conduct related to the handling of the loan modification.

In Alvarez, the California Court of Appeal correctly held that the Nymark rule could not be read that broadly and effectively sheild servicers from neglience in every circumstance. Instead, the court noted, “[e]ven when the lender is acting as a conventional lender, the no-duty rule is only a general rule. …Nymark does not support the sweeping conclusion that a lender never owes a duty of care to a borrower. Rather, the Nymark court explained that the question of whether a lender owes such a duty requires “the balancing of the ‘Biakanja factors.’ ”